STOCK NOT PAID IN CASH 1.. Cash payment not the universal rule.—A care less reading of the incorporation statutes might easily give the impression that the capital stock of a corpora tion must always be paid in cash. But this is not the case, and a more careful search of the statutes will dis cover provisions which make it possible to issue stock against property of various kinds, or sometimes serv ices, with the sole qualification that these shall be esti mated at their true value. Thus arises a wide variety in the payment of stock subscriptions, some forms of which must be considered.
2. Paying for assessable stock out of pro fits. When a successful concern has issued assessable stock, and has not called for full payment, the withholding of dividends has the practical effect of paying up the stock, since it relieves to that extent the necessity of calling the balance of the payments, and increases the capital of the company as much as tho regular divi dends had been declared and an assessment for a similar amount had been made against the stock. From the accounting and legal standpoint, however, this stock is still only partly paid. The earnings with held by the company appear on its books as surplus, and have not reduced the amount still callable on the stock before it becomes fully paid. The surplus may render financial difficulties less likely and, of course, the credit and stability of the company is enhanced by retaining both the surplus and the additional stock liability of subscribers.
But stockholders desire to avoid the uncertainties of assessable stock, preferring the more marketable and less risky full-paid shares. It is therefore customary, under these circumstances, for the company to declare a special dividend equal to the callable and unpaid portion of the subscriptions, at the same time making an assessment of an equal amount to pay up the shares. Stockholders may then take out full-paid certificates and the amount of the dividend is charged to surplus and credited to capital stock account on the books of the company. The effect of this transaction is to pay for stock out of earnings.
3. Converting profits into stock.—In a company which has issued only full-paid and non-assessable shares, upon which regular dividends have been paid, the surplus may be similarly distributed in payment for stock by declaring a special stock dividend, which will likewise transfer the credit from the surplus ac count to the capital account of the corporation. Each stockholder will then receive a new certificate for ad ditional full-paid shares to the extent of his dividend. Thus, if a stock dividend of 25 per cent is declared, the holder of one hundred shares of the par value of one hundred dollars each, will receive a new full-paid certificate for 25 shares. We shall see later, in the discussion of dividend and capital accounts, the effect of such a transaction upon the balance sheet of the company.
The value of each share of stock outstanding will be decreased about 20 per cent in the above illustra tion, because there are now 125 shares outstanding against property formerly represented by only 100 shares. But the stockholder may find himself a trifle better off after the stock dividend than before, as the 125 shares will probably have a slightly higher aggregate market value than the 100 shares did be fore, and the established rate of dividend which he formerly received upon only 100 shares, will now probably be continued on the 125 shares, thus sub stantially increasing the income and marketability of the stock.
4. Building up a surplus.—Paying for stock out of earnings must not be confused with the increase of stock values thru the creation of a surplus. The com mon stock of the United States Steel Company, for instance, was not paid for directly by its holders out of the earnings of the company, but it has achieved a real value from the accumulation of surplus earnings re invested in the business. When the stock was issued it represented largely the expectations of future earn ings. By good management and a conservative divi dend policy the United States Steel Company has increased its assets until the common stock now rests largely upon tangible values in the business.